No one can deny the importance of food security in the present time. This can be achieved by following two pronged strategy, containing wastages and boosting yield. Though, all the successive governments of Pakistan talked about the importance of agriculture and need for enhancing lending to farmers, lack of coordinated efforts never allowed exploitation of the real potential of the country. This becomes all the more pinching because feudal lords enjoy majority in legislative, have the capacity to influence policy making process and because bulk of their income comes from agriculture/agro-based industries.
The British Raj had released the potential of the areas now comprising Pakistan that is the reason it built the largest man-made irrigation system in this part of the world. It also constructed, roads, bridges and railroad network to take locally produced cotton to Manchester, still the centre of textile and clothing in the United Kingdom. Pakistan is among the top producers of cotton, rice, sugarcane and milk, besides mango and kinnow. The country has remained net importer of dried milk, cotton and wheat for a long time. The real potential of agriculture could not be realized because the international donors persuaded the successive governments in Pakistan to focus more on establishing industrial units for which raw material was not available.
Gradually, the country lost its ‘competitive advantage’. Pakistan is among the top producers of cotton but its share in global trade of textiles and clothing is a dismal two percent. It is mainly because spinners have been dictating policies that could encourage export of yarn and export of unprocessed cloth. They have remained the biggest beneficiary of banking system but the largest percentage of non-performing loans also pertains to them.
It is known to all and sundry that cultivable lands of Pakistan are deficient in nitrogenous content. The successive governments facilitated creation of urea manufacturing plants and current installed capacity exceeds 7 million tons per annum, capable of producing 1.2 million tons surplus urea. However, due to suspension/curtailment of gas supply to urea plants the country has been importing above one million ton urea for last couple of years.
Added to this is imposition of gas infrastructure development cess (GIDC). The basic purpose of imposition of this tax was to mobilize funds for the construction of Iran-Pakistan gas pipeline (IP). There are apprehensions that IP would never become a reality. Therefore, there is no justification for collecting this tax because the amount collected would be used for ‘other’ purposes.
State Bank of Pakistan has embarked upon ‘warehouse receipt financing’ plan, directly being supervised by Saeed Ahmed, Deputy Governor. This program is aimed at achieving two key objectives: 1) making the farmers part of formal banking system through financial inclusion program and 2) containing wastages through construction of state-of-the-art ‘depositories’ to facilitate the farmers not to sell their produce under stress. The central bank also wants to facilitate trading of these receipts at Pakistan Mercantile Exchange (PMEX).
One of the apprehensions of the farmers is unauthorized movement of their holdings by the collateral management companies. This is a very valid point because once the produce is deposited at the warehouse maintaining identity, securing from potential losses and above all monitoring the movement by the owners of produce is almost impossible, unless there are credible collateral management companies.
Even if one begins with three basic commodities i.e. wheat, rice and cotton, the quantum and value of assets to be handled runs into billions of dollars. Therefore, first storage facilities have to be created, depositories and collateral management companies established that have to get their infrastructure and produce kept insured. It may be true that the central bank offers loans for the construction of warehouses on concessional rates but a few role models have to be created on top priority.
The number of growers runs into millions and most of them are small landholders. This can pose some technical as well as handling issues for the collateral management companies. This has the potential to defeat the basic objective, financial inclusion of farmers. Therefore, one has to look for a produce where the number of producers is small, storage facilities are available and banks also have the infrastructure and experience of lending against the produce. Sugar industry qualifies the most on the above stated factors. However, one of the objections could be that millers will benefit from this arrangement rather than the sugarcane growers.
This objection could come only from those who are not fully aware of the dynamics of sugar industry. Mills operate (crush sugarcane) around 150 days and sugar produced is sold till commencement of next crushing season. Since 90 percent of the cost comprises of sugarcane, payment to growers is dependent on sale or borrowing by the mills from the banks. This practice has been going on for decades and all the stakeholders are fully aware of the mechanism. Under the proposed system mills will the receipt from one of the depository and trade it at PMEX rather than approaching the bank to get cash.
The added advantage is that there are about 85 sugar mills in the country, all of these have reasonably reliable warehouses and collateral management in being done for decades. Following this as a pilot project will further improve the confidence of all the stakeholders in a system that they have been using for decades. The quantum of this business is huge and based on sugar production of around 5 million tons the value of trade (based on single transaction) comes to Rs250 billion or US$2.5 billion. This amount can increase manifold if mills succeed in improving capacity utilization, currently hovering around 50 percent.
Sugar industry is the driving engine of rural economy and successful operation of warehouse receipt financing system will also encourage wheat, rice and cotton growers to take benefit of the new system.